The real estate market is tight, believe me, I’ve been looking for a place.
Inventory is low, and prices are relatively high. Some properties I’ve looked at within Loop 610 have appreciated 50 percent in the last two years.
The average price of a single-family home increased 7 percent from April 2013 to April 2014, to an all-time high, according to the Houston Association of Realtors.
That started me worrying, am I buying at the height of the market? Am I buying into a bubble?
These are fair questions that plague every real estate buyer, particularly following the Great Recession and the collapse of home values in 2009. But a blazing market is not the only sign of a bubble, and it doesn’t necessarily mean that you should sit it out.
Sometimes prices rise for good reason. The difference between a bubble and a strong market is in the details of who, why, where and how.
A key giveaway that a bubble is building is when speculators are doing the buying, not homesteaders. This creates artificially high demand and artificially high prices.
The latest census data, though, tells us an average of 95 people a day moved to Houston in 2013, and that’s not counting the 6.7 percent annual increase in surrounding Harris County. The Houston area has added 10,000 jobs a month so far this year, according to the Bureau of Labor Statistics.
Robert Gilmer, top economist at the Institute for Regional Forecasting at the University of Houston, reports that Houston has added 600,000 jobs since 2003.
“We’ve needed to build a new Oklahoma City within the confines of the Houston area,” he said.
That suggests the demand is coming from people who plan to live in the homes they are buying. If investors were running up the prices, they would be flooding the rental market and driving rents down while their property appreciates. But the Houston Association of Realtors reports that since last year the average rent for a single-family home has increased 4.1 percent to $1,667. The average rent for a townhouse or apartment is up 5.1 percent to $1,477.
The Federal Housing Finance Agency’s home price-to-rent ratio in Houston is inching up, though, and that means paying rent could soon be more attractive than owning. With Houston developers building thousands of apartment units, rents could drop and shift that ratio even more.
Balancing supply with demand is hard for developers, Gilmer said.
“Real estate is always the last to know when to start and when to stop,” he added.
Ups and downs
With more than 40 years in real estate, residential broker Roger Martin has seen more than a few bubbles burst. He pointed out that California home prices were rising 39 percent a year to create the last bubble, and by contrast Houston’s current annual increase is reasonable.
Martin is also quick to deride the low-interest, zero-down payment, adjustable-rate mortgages that helped people purchase homes they couldn’t afford.
“In the last bubble, it was funny money,” Martin told me at his office in West University. “Stupid loans are really a harbinger.”
Credit tougher to get
The Mortgage Bankers Association reports that while mortgage availability is growing, much of the lending is for higher-end clients. Credit is still much harder to get than it was in the mid-2000s, according to the group’s statistics.
One sign of responsible lending is the 43.7 percent drop in foreclosures from April 2013, according to the latest data from the Houston Association of Realtors.
When creditworthy homesteaders are increasing demand for houses and supply shrinks, the subsequent higher prices signal to builders that it’s time to get to work on single-family units. But will builders flood the market and depress prices?
Where you buy makes a difference, Gilmer said. In the suburbs outside of Beltway 8, where developers can add inventory very quickly, values could decline in the long term.
“We can carpet the prairie with houses, we know how to do that,” he said. “That’s an example of where we’ll probably see those home prices come down.”
But within the Inner Loop, home values will likely remain strong because there is only so much land. The east side of Houston will also see sustained growth, Gilmer said, as companies hire fewer white-collar professionals to work downtown and more blue-collar workers to build projects along the Ship Channel and the Gulf Coast.
Why prices come down
Markets, though, are always cyclical. In real estate, overbuilding is often what leads to drops in home values, or at least a flattening of prices in blue chip areas.
“Where you draw the line as to when have you gone too far must be really hard to do, because it seems like we almost always overbuild,” Gilmer said. “I couldn’t really predict that right now for any of these markets because we continue to see such rapid job growth.”
Considering all the data I examined for this column, I remain a buyer. With luck I might even sign a contract this week.
Only 20/20 hindsight will confirm if it was the right decision.